SA fixed income: will Goldilocks conditions continue to prevail?

South African fixed-income investors have enjoyed another exceptional year, with the local bond market extending the strong performance seen in 2024.

For years, domestic bond returns came largely from income, but since last year, investors have also benefited from significant capital gains. Long-dated nominal bonds have led 2025’s rally, with 30-year yields over 1.8% lower year to date.*

A combination of supportive developments has buoyed sentiment. Interest rate cuts, both locally and internationally, have helped underpin the market. Inflation has surprised to the downside, while National Treasury’s formal endorsement of a 3% inflation target, with a one-percentage-point tolerance band, has added credibility to the inflation framework.

The Medium-Term Budget Policy Statement (MTBPS) reaffirmed fiscal discipline and signaled that macroeconomic stability is once again a policy priority. Government debt-servicing costs are now projected to rise by only 3.8% on average – materially lower than previous estimates. South Africa’s removal from the FATF grey list should improve capital flows, while S&P Global’s upgrades to both local- and foreign-currency sovereign ratings have added further support.

Taken together, these factors have delivered a very favourable environment for SA bondholders – near-‘Goldilocks’ conditions. But with global dynamics shifting, risks are rising.

Reflation, not recession, is now the bigger global risk
Concerns about a hard landing in the US have faded, replaced by fresh worries about sticky inflation. With inflation proving more persistent than expected, the Federal Reserve now has less scope to deliver rate cuts. This leaves US Treasuries vulnerable to a pullback.

The risk of political interference with the Fed still exists and could lead to further US rate cuts delivered in 2026.

Looking ahead, we expect a cyclical US recovery into 2026, driven by easier financial conditions and fiscal expansion. This would likely see Treasury yields drift higher and markets price out some of the remaining expected Fed cuts. In anticipation of this, we have reduced interest-rate-sensitive exposure in our portfolios, especially in instruments such as swaps that closely track US rate moves.

GNU functioning better, but 2026 may test alliance
Following the political turbulence around the Budget earlier this year, domestic politics have settled. Crucially, reform rhetoric is increasingly being backed by implementation. Still, the second half of 2026 – leading into local government elections – may bring renewed volatility and test the cohesion of the Government of National Unity.

SA bonds versus cash
On a 12-month view, we expect SA bonds to meaningfully outperform cash. However, after a strong rally and given an uncertain global backdrop, some short-term consolidation in yields is likely.

Our inflation forecasts remain unchanged: headline and core inflation at 3.2% for 2025, with headline inflation peaking at 3.7% in December 2025. For 2026, we expect headline inflation of 3.4% and core inflation of 3.3%.

Real yields have lagged, with inflation surprising to the downside and a significant inflation premium still priced into long-dated nominal bonds. We remain overweight SA bonds – particularly longer maturities – and hold no inflation-linked bonds.

Supportive monetary and fiscal policy
We expect the South African Reserve Bank to deliver at least two further rate cuts by the end of 2026. As most of this is largely priced in, it is unlikely to materially drive shorter-dated yields meaningfully lower.

The MTBPS highlighted the progress in fiscal consolidation over the past five years. Debt to GDP is expected to peak in the current fiscal year, enabling National Treasury to reduce weekly issuance significantly. We also see potential upside to Treasury’s 2025/26 revenue assumptions, which currently do not factor in the possibility of increased tax receipts from higher precious metal prices.

Improved growth, supported by rate cuts and ongoing structural reform, could pave the way for further sovereign rating upgrades in the coming years.

Conclusion
‘Goldilocks’ conditions may start to fade, but we remain constructive on South African bonds, albeit more cautiously after the rally. Listed property, which has lagged bonds, looks attractive, and we continue to identify opportunities in high-quality credit.

The rand remains anchored by firm terms of trade, resilient commodity demand – especially for precious metals – and a softer US dollar. Volatility will persist, but the local currency is better supported than in past cycles.

*As at 30 November 2025